Pensioner households pay enough tax to buy a brand new car each year

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The average retired household contributes £6,500 in tax a year, according to new analysis by Prudential.

(PRWEB UK)10 June 2015

The amount of tax paid annually by the average retired household in the UK is enough to buy Britain’s cheapest brand new car every year and keep £500 aside to cover its running costs (1), according to new analysis of official data (2) by Prudential.

The analysis of the latest release of ONS data reveals retired households are paying an average of £6,500 a year in direct and indirect taxes.

The figures, taken from the 2012-13 tax year, show a year-on-year increase in the average income of a retired household of nearly £500 a year to £21,800. However, the amount being paid in tax by retired households has also increased, and pensioners are still handing over 30 per cent of their total income to the tax man. In total, £47.26 billion (3) was paid in taxes by all retired households during 2012-13.

This figure looks set to rise with the new pension freedoms that came into force in April – over-55s are now able to access more easily the money they have saved in defined contribution pension funds, much of which will be liable to tax at the retiree’s marginal rate.

The Treasury estimated after last year’s Budget4 that the new rules would generate £320 million in additional revenue during the 2015-16 tax year, rising to £1.22 billion by 2018-19, underlining the need for people approaching retirement to factor tax into their financial planning and explore options relating to pension tax relief.

Stan Russell, retirement income expert at Prudential, said: “The new pension rules that came into effect this April give savers and retirees more choices and greater flexibility over how they take their income. But there is a risk that people could end up paying more tax than they expected which, with careful planning, they might be able to avoid.

“A consultation with a financial adviser or retirement specialist before making any choices about retirement income solutions may not reduce tax bills by enough to buy a new car, but it should help those looking to make the most of their pension savings and avoid the risk of paying unexpected tax.”

Prudential’s analysis of the 2012-13 data also highlighted a slight shift in the balance of taxation between direct and indirect faced by retired households. Indirect taxes including VAT, Vehicle Excise Duty as well as tax on alcohol and petrol accounted for 60.2 per cent of retired households’ average annual tax bill, an increase from 58.7 per cent in 2011-12. Direct taxes including income tax and council tax accounted for the rest.

On average, retired households pay £3,900 in indirect tax and £2,600 in direct tax. The biggest single tax item is VAT, which accounts for 8.2 per cent of the average retired household’s income, (a slight increase from 7.8 per cent in 2011-12). Income tax is next on the list and takes 7.4 per cent of retired household income, (a slight decrease from 7.8 per cent in 2011-12).

Stan Russell added: “Retired households make a major contribution to the Exchequer every year whether it is in direct or indirect taxes and clearly it is not possible to avoid all taxes simply because you have stopped working. It’s a stark reminder that not all the income you receive in retirement will be yours to spend as you like.

“Irrespective of the new pension rules and their tax implications, the fundamental principles remain true – the best way to secure enough income for a comfortable retirement is to save as much as possible as early as possible in your working life.”